Why it's worth following the November Mortgage Monitor

Why use low mortgage delinquency rates to make strategic decisions?

The Lender Processing Services (or LPS) Mortgage Monitor is a monthly report that provides delinquency and foreclosure data

Lender Processing Services is a vendor to mortgage originators, handling mortgage processing and default management outsourcing. So it comes across a wealth of top-down mortgage information that many professionals and analysts use to help make strategic decisions.

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90-day mortgage delinquencies rise to 6.45% in November

Mortgage delinquencies are falling in general as home prices rise and the foreclosure pipeline clears. While 6.45% seems low compared to the peak of 10%, the “normal” level prior to the housing bubble was in the 4%-to-5% range. This also reflects the mortgage modification push by the Obama Administration, which has used various programs (like HARP, the Home Affordable Refinance Program, and HAMP, the Home Affordable Modification Program) to allow distressed borrowers to refinance or modify their mortgages into something more affordable.

The foreclosure pipeline is clearing and is mainly an issue in what have been dubbed “the judicial states” (like New York and New Jersey). Non-judicial states have shorter timelines between delinquency and foreclosure. Judicial states require a judge to approve foreclosures, and they often press the borrower and lender to find a way to keep the borrower in their home.

Highlights of the report

Lender Processing Services doesn’t have a neat explanation for why delinquencies suddenly ticked up in June. Over 700,000 borrowers made their May payment and missed their June payment. It looks like that has reversed the course, and Cure rates also fell to a five-year low. The decrease was broad-based and hit nearly every state.

Declining delinquencies mean good things for non-agency REITs

Non-agency REITs like PennyMac (PMT), Two Harbors (TWO), or Redwood Trust (RWT) take credit risk, while agency REITs that invest in government-guaranteed or government-supported mortgages, such as Annaly (NLY) and American Capital (AGNC), do not. While agency REITs don’t take credit risk, defaults act like prepayments, which means these REITs have to reinvest at lower rates. So they aren’t completely insensitive to delinquencies. Falling delinquencies are extremely important to non-agency REITs—especially those that invest in the junior tranches of securitizations. These bonds are high-risk and high-reward. This portion of the mortgage-backed securities market has rallied significantly over the past two years. Some REITs, which had been given up for dead, are up ten-fold over the past year due to the rebound in distressed MBS.

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